With the recent sputtering of the bullish-dollar reflation trade, perhaps it’s time to pay a bit more attention to what the president and his advisers are saying about currencies. A potentially tradeable pattern is emerging.

The administration seems determined that currencies which are “undervalued” based on purchasing-power-parity (PPP) measures, and are issued by nations with current-account surpluses should strengthen

Looking at these drivers in isolation, the policy seems logical. In reality, neither factor tends to be particularly important on anything less than a very long-term horizon. Unless — and here’s the fun bit — there’s a macro catalyst to bring them to the fore. The political shift in the U.S. could be that spur

Within G-10, Switzerland has the largest current account surplus, yet the most expensive currency based on IMF’s PPP. Norway is next up in both categories. The only G-10 peers with both a surplus and relatively undervalued currency on PPP are the euro and the yen. Both were recently singled out

However, within emerging markets there are a number of currencies that qualify. The standout is Thailand: forecast to have a 2017 current account surplus north of 7% of GDP, and the baht is 65% undervalued, according to the PPP measures. Its largest trade surplus is versus the U.S.

What about the other side of the equation? Those currencies that have current account deficits yet are overvalued? Only five currencies count as being more expensive PPP-wise than the greenback. Only two of them have current account deficits: the Australian and New Zealand dollars

So if it can be assumed that Team Trump A) is guided by a coherent and global view of how currencies should behave, and B) will stay on message, then AUD/THB and NZD/THB look vulnerable. Admittedly, those are big ifs

Writing about a subject is the best
way to educate yourself about it, and when I flick through past work I remember how much
they taught me, if no one else. Mainly they taught me that I didn’t know very much. But they
also taught me that most other people didn’t know much either. Thus, some key themes
which stand out include the illusory control of policy makers, the presumed knowledge of
those looking to them to actively do good, the ease with which we fool ourselves, and how
best to protect capital in the face of such unavoidable uncertainty. -- Dylan Grice